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A Disappointing Year for Wheat Complex, Analyst Says

Big production trumps weather problems.

Wheat markets last week were mixed, with the winter wheats about a nickel lower while the spring wheat market in Minneapolis was unchanged. Minn was trying to regain its leadership in the wheat complex, and the winter wheats got caught up in the slow river and rail traffic to the gulf.

That slow traffic should be alleviated this week with big rains across the central U.S. replenishing river levels. Rail traffic should also improve once Hurricane Nate fizzles.

Speaking of weather, we see conditions for a La Niña developing that will have an impact on several regions. Of high concern is the tendency for lingering dry conditions in Brazil and Argentina into mid-Autumn on top of the dryness issues Brazil has already faced so far this planting season.

The La Niña is also expected to bring more rain to eastern Australia, and that looks to be developing already with weekend rains over most of the eastern coast. But those rains are coming too late for winter wheat and barley, so producers are hoping that spring crop production will be above average to help offset a disastrous winter crop.

Weather analysts say that the developing La Niña will also keep the northern Plains cooler than normal through fall and dryer than normal in the Midwest. The northern Plains have already experienced some early cold and snow, so no surprise there. The Midwest was clearly trending dry, but weekend rains will help recently planted winter wheat and replenish some soil moisture.

In other news, wheat production estimates for Russia are hovering at the 83 MMT level, with 95% of the crop harvested. A monster crop by anyone’s standards, blowing up last year’s record crop of 72 MMT. The country’s exports are also on a record so far this marketing year, but are expected to slow down significantly during winter when most of its port capacity will freeze over.

We also expect that Australia will have little to export beyond its long-term commitments, and therefore would not have much influence on world price in the normal time slot of December/January.

Argentina, the other major producer in the Southern Hemisphere, is experiencing both extremes – too much rain in one region and not enough in another. With over 50% of the wheat crop standing in water, not only is quality declining, but also yields are starting to diminish. While most of Argentina’s excess supply usually goes to Brazil, Brazil only buys high-quality wheat – perhaps an indication of why Minneapolis is regaining some strength.

Needless to say, it has been a disappointing year so far for the wheat complex. The world was awash in wheat to start the season and we got not one, but two major production problems in the Northern Hemisphere (U.S. and Canada). Prices shot higher, particularly for spring wheat, and were given another boost by a close call on drought in the Midwest. But then prices fell apart as Russia produced its massive crop. Now there is another production problem in the Southern Hemisphere, and possibly two.

The only big producer this year was Russia; virtually every other major wheat exporter had a difficult growing season. Not exactly a case for a bear market. Yet, prices are still hovering near the seasonal low set in late August. If nothing else, it speaks to the power that Russia has on world price – of which we are clearly dependent. But it can’t carry the load by itself forever, and it’s worth pointing out that Russia is planting next year’s crop into dry conditions in the southern region (where its export supplies originate).

My point is that I think long-term lows in wheat were established in late August. With winter coming and reduced competition from the south, a window should open for our own exports. There is a good chance for a nice rally into the late winter. It’s also worth noting that wheat plantings are expected to be down again this year to another new all-time low, albeit into good conditions.

While I don’t expect a bull market to develop in the short term, I would look for a trading range for the next few months.

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